AIG May Not Attract Buyers to SunAmerica U.S. Variable Annuity Business

American International Group Inc. offers some "living-benefit" guarantees to policyholders on stock-market linked variable annuities, but the insurer may not easily attract buyers to its SunAmerica businesses if it puts them up for sale. The industry is moving away from these guarantees as they've become too costly for companies to offer, an expert said.

From a producer perspective, the standard living benefit in the industry would be the guaranteed minimum withdrawal benefit, which guarantees a systematic withdrawal percentage for life, said Craig Hemke, president and founder of BuyaPension.com, a company that sells single-premium immediate annuities to individual investors.

But these benefits progressed from annual "step-ups" to quarterly, monthly and even daily step-ups, he said. A step-up refers to when a company locks-in for the investor any of their account gains for future income distribution purposes, Hemke said.

Starting around 2005, "it got very competitive in terms of which company could outdo the next," Hemke said, referring to what he dubbed an "arms race" on variable annuity living benefits. AIG "wasn't a major participant" in that arms race, he noted, however. It "tried to stay competitive" but never had the "sexy, exciting" new benefit like companies such as ING, Transamerica or Prudential Financial, Hemke said.

With the volatility in the stock market over the past nine months, hedging against the risks on living benefit guarantees has become expensive for many U.S. variable annuity writers, he said. There's significant movement away from them, and companies are trimming back or eliminating them altogether, Hemke said.

As a result, AIG may have trouble selling the SunAmerica variable annuity business, he said.

AIG was bailed out last year by the U.S. government with a multibillion dollar rescue package.

According to Frank O'Connor, product manager, VA Database, for Morningstar, the AIG companies that sell variable annuities to individuals are SunAmerica Life Insurance Co., AIG SunAmerica -- now known as SunAmerica Annuity & Life Assurance Co.; and First SunAmerica Life Insurance Co.

When SunAmerica companies' sales are combined with VALIC, or Variable Annuity Life Insurance Co., another AIG subsidiary that primarily writes group annuities, AIG was the eighth-biggest seller of variable annuities in the United States in 2008, with sales of $8.1 billion, according to Morningstar.

"There was probably a perceived value, before everything that happened in the market, that you could sell SunAmerica to somebody that wanted to get into the variable annuity business -- you can step right in with a brand name and a distribution team," said Hemke. But with companies now getting away from variable annuity contracts with living benefits, "there may not be as much value there as perceived.

"I wouldn't be surprised if the whole thing just wasn't shut down at some point," he said. SunAmerica would still need to stand behind the guarantees on the existing contracts, Hemke said.

Meanwhile, last month, AIG named Jay S. Wintrob, formerly president and chief executive officer of AIG Retirement Services, as president and CEO of its U.S.-based life insurance and retirement services businesses, a new position (BestWire, Aug. 20, 2009). These businesses, AIG said, sell their products under the American General; AGLA, or American General Life & Accident; SunAmerica; VALIC; and Western National Life Insurance Co. brands. Western National was formerly known as AIG Annuity.

At the same time, Mary Jane Fortin, senior executive vice president and chief financial officer of the U.S. life companies, was named president and CEO of American General Life companies.

Christina Pretto, an AIG spokeswoman, told BestWire around that time that the company never said it would sell any of its U.S. life insurance operations.

Overall, AIG's U.S. life and annuity businesses have "been very profitable," said Adam Sherman, founder of Firstrust Financial Resources, a firm that advises high-net worth individuals on insurance and estate planning. Several companies are interested in acquiring them, but are offering "low-ball prices" right now, he said.

MetLife, Prudential Financial, Axa and John Hancock would all be "logical" potential buyers, Sherman said.